It was a down week for the market as the Dow initially led the indexes lower early in the week, then was followed by the Nasdaq later in the week. Though on a positive note, the market rebounded nicely from its lows on Friday afternoon.
By week’s end the S&P 500 was down marginally, while the Dow and Nasdaq both lost 1%.
The Stock – Sweetgreen (SG)
Sweetgreen is one of a handful of cookie-cutter restaurants out there that have turned very strong this year as the growth potential comes into focus and some money rotates out of tech areas and into other risk-on sectors.
Sweetgreen is best known for its salads and warm bowls that include lots of yummy ingredients, and it’s been able to produce them with consistently high quality across its various locations, thanks in part to many deals with local producers to get fresh produce. But the firm is also branching out into protein-focused plates (miso-glazed salmon, caramelized grilled steak, etc.) that’s helping broaden the appeal and boost dinner sales.
The firm ended March with 227 restaurants (it will open 25 or so this year, though 15% to 20% unit growth can be expected in 2025 and beyond), with the group of six new openings in Q1 already achieving average weekly revenue that’s greater than the average for all locations!
Then there’s the firm’s Infinite Kitchen model, with machines used to dispense food (less labor costs); the two open so far have similar sales figures as other Sweetgreen locations, but the restaurant-level margins are 10 percentage points above the firm’s average—which is why seven of this year’s new openings will be Infinites, as well as three to four retrofits of existing locations. Growth here has been solid and Q1 continued that trend (revenues up 26%), and while earnings are in the red, EBITDA is about breakeven but headed higher and restaurant-level margins are improving nicely (18% in Q1 vs. 14% a year ago).
Long term, if the top brass executes, there’s no reason Sweetgreen won’t grow many-fold from here, with the Infinite Kitchen idea a potential driver.
Technical Analysis
SG’s never-ending post-IPO decline and bottoming effort finally ended on March 1, when the stock exploded higher on earnings and went wild for a few weeks afterwards, reaching 26.5 by the end of the month. The market yanked it lower from there, with some ugly action in early May, but the damage wasn’t unreasonable and the Q1 report saved the day, creating another huge upside gap. We didn’t want to chase it at that point, but now has started to pull back, and while the day-to-day action is sloppy, the dip has been very reasonable (still above its 25-day line). Stop — 25
The Covered Call Trade
Buy Sweetgreen (SG) Stock at 31.50, Sell to Open July 32 Strike Calls (exp. 7/19) for $2.25, or a Net Price of 29.25 or less
Static Return: $225 per covered call (7.69%)
Breakeven: 29.25
Covered Call Return (if assigned): $275 per covered call (9.4%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 29.25 or less. (In this case 31.5 minus 2.25 = 29.25. Or another example is you could pay 31.40 for the stock and sell the call for 2.15, which also equals 29.25)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| Pan American Silver (PAAS) | 18.75 | 21 | 15.8 | June 19 -- $1.10 | $2.00 |
| Pinterest (PINS) | 41.5 | 41 | 35 | July 41 -- $2.75 | $1.85 |
| Oscar Health (OSCR) | 22.5 | 19 | 17 | July 22.5 -- $2.30 | $1 |
| Dutch Bros (BROS) | 36.35 | 35 | 31 | July 37.5 -- $1.65 | $1 |
| Robinhood (HOOD) | 20.85 | 21 | 16.8 | June 20.5 -- $1.60 | $1.50 |
The next Cabot Profit Booster issue will be published on June 11, 2024.
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